HSBC 2009 Annual Report Download - page 176

HSBC HOLDINGS PLC
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value
174
between interest rates and foreign exchange rates.
The movement in Level 3 trading liabilities during
the year was primarily due to the issue of new equity
derivative linked structures classified in other
portfolios, partially offset by transfers out of Level 3
as a result of increased observability of long-dated
volatilities.
The increase in derivative liabilities valued
using a valuation technique with significant
unobservable inputs was primarily attributable to the
transfer into Level 3 of swaps linked to securitisation
structures whose valuation utilises inputs relating to
the prepayment rates for the underlying asset pools
which are unobservable. This was partially offset by
transfers out of structured interest rate and equity
derivatives due to increased observability of long-
dated swaptions and equity volatilities.
Reconciliation of fair value measurements in
Level 3 of the fair value hierarchy
The following table provides a reconciliation of the
movement between opening and closing balances of
Level 3 financial instruments, measured at fair value
using a valuation technique with significant
unobservable inputs:
Movement in Level 3 financial instruments
Assets Liabilities
Available
for sale
Held for
trading
Designated
at fair value
through
profit or loss Derivatives
Held for
trading
Designated
at fair value
through
profit or loss Derivatives
US$m US$m US$m US$m US$m US$m US$m
At 1 January 2009 ........................ 9,116 7,561 460 9,883 6,509 – 3,805
Total gains/(losses) recognised
in profit or loss ......................... (260) (730) 97 (5,275) (107) (3) (1,372)
Total gains recognised in other
comprehensive income ............ 617 85 – 119 301 10 94
Purchases ..................................... 1,785 1,598 260 – 22 – –
New issuances .............................. – – – – 2,522 500 –
Sales ............................................. (806) (2,166) (13) – – – –
Settlements ................................... (1,059) (295) (6) (104) (1,266) – (206)
Transfers out ................................ (3,043) (1,077) – (1,057) (537) – (620)
Transfers in .................................. 3,864 1,444 426 887 1,330 – 3,491
At 31 December 2009 .................. 10,214 6,420 1,224 4,453 8,774 507 5,192
Total gains/(losses) recognised in
profit or loss relating to those
assets and liabilities held on
31 December 2009 .................. (371) (596) 98 (3,753) (136) (3) (135)
For available-for-sale securities, the
unobservability of valuations of asset-backed
(particularly Alt-A and leveraged finance-related)
securities and the Asian bond portfolio discussed on
page 173 resulted in assets in these categories being
transferred or purchased into Level 3 during 2009.
Transfers out of Level 3 were primarily in respect of
commercial property related ABSs due to certain
valuations in these asset categories becoming
observable during 2009.
For trading assets, transfers into Level 3 arose
principally on ABSs, fixed income securities and a
syndicated loan position where valuations for the
specific instruments were not observable. Transfers
out also related principally to ABSs and fixed
income securities as valuations for specific
instruments became observable. Purchases relate
primarily to the unwind of certain ABS total return
swap funding transactions, in which HSBC’s market
risk position did not change, but securities were
purchased in place of the derivative transactions.
For derivative assets, transfers out of Level 3
were driven by decreases in residual maturity of
longer-dated equity options to below the
observability boundary, movement in equity prices
leading to previously out-of-the money or in-the-
money options becoming closer to at-the-money
options, and some increased observability of long-
dated swaption and foreign exchange volatilities.
Transfers in were largely driven by the
unobservability of prepayment rates on swaps linked
to third-party securitisations.
For held-for-trading liabilities, transfers into
Level 3 were primarily due to a reduction in the
observability of volatilities and gap risk parameters
on embedded derivatives within issued structured
notes. Transfers out of Level 3 were driven by